We continue the series of educational posts that you have been asking for. Today we will talk about and learn how to use another, no less popular tool, through which you can also trade.
RSI is similar to MACD - it also calculates the average price of an asset over a certain period of time to identify potential trading opportunities.
But the RSI calculations themselves differ from the MACD model.
The indicator calculates the latest price momentum fluctuations over the last 14 periods for a specific asset, this is done by dividing 14-period profits by 14-period losses.
As a result, investors get a clear idea of the dynamics of the latest trades for the asset in question.
The RSI indicator formula gives a ratio of 0 to 100.
If the RSI is above 70, the underlying asset is overbought over the last 14 periods. Thus, it may be worthwhile to start selling the asset soon, as the market will definitely correct the trend of excessive purchases.
Conversely, an RSI below 30 signals that the asset has been oversold in recent periods. So, again, it is MAYBE time to consider buying the asset while the price is relatively low.
We also use RSI to identify divergences.
This is a divergence between the price and the indicator, when the asset continues to fall and reach a new low, and the indicator starts to rise.
Interested in learning more about "divers"?
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